IMI Magazine

IMI Magazine

News Analysis

Will Rover be able to pay the rent?

Coming so soon after allegations that its senior directors have been giving undue attention towards ensuring a comfortable retirement, it is natural perhaps that MG Rover’s sale-and-leaseback deal at its Longbridge facility should have caused a further degree of disquiet. Those of a more suspicious nature will be minded to assume that this arrangement represents a means of generating further cash for purposes other than the greater good of the company and its workforce.

It would be wrong, though, to condemn outright the move as a blatant asset stripping manoeuvre. Applied appropriately, sale-and-leaseback is an entirely respectable means of freeing up capital which is tied up in land and buildings, and which may be more profitably allocated to developing the business. For MG Rover the imperative now is to develop and bring to market an attractive range of mid-range cars to enable it to compete more effectively against European and Far Eastern competitors who have updated models and enjoy far superior economies of scale. If the funds released are used to this effect and result in a line-up of vehicles which enable the company to recover from its present pitiful market share, then the scheme will have been worthwhile.

The worry, of course, is that instead the money will be swallowed up in the funding of continuing losses, leading to the position where there is a diminished asset base, a hefty annual rent demand and a requirement for outside funding which may not be readily available from regular commercial sources.

With financial losses declining, MG Rover appears to be moving in the right direction but remains highly vulnerable to shocks - such as a market downturn or prolonged labour unrest - of the type which caused so much damage to the British motor industry in the past. Clearly the next couple of years will be make-or-break time, and during this period the company will need maximum cooperation from its workforce and the full support of its franchised network.

Nissan’s canny game over the euro

With the euro riding high and as a consequence UK manufacturers regaining a competitive edge in the markets of continental Europe, now might seem a funny time for a multinational vehicle manufacturer with a British assembly facility to be making threatening noises over the consequences of the country¹s continuing self-exclusion from the eurozone. How then should Nissan’s warning that the Almera replacement will not necessarily be built at Sunderland if the government persists in its dithering over membership of the eurozone be treated?

This fulmination is all the more bizarre in the context of Sunderland’s position, on most calculations, as Europe’s most productive vehicle manufacturing plant. In a region blighted by chronic vehicle manufacturing overcapacity and where the inadequacies of inefficient plants are mercilessly exposed, logic points to production migrating to plants where productivity is highest and unit costs lowest.

Admittedly, fluctuating exchange rates spawn uncertainty and are a hindrance to forward planning, especially in the sourcing of components and the organisation of a regional manufacturing network, but this has always been the case with industries as international as automotive, and there is no obvious long term solution to this problem between the major vehicle trading blocks of North America, Europe and Japan. Moreover, recent pronouncements from a wide constituency of motor industry leaders, including those from Nissan, appeared to have accepted that the chances of the UK acceding to euroland in anything other than the long term were minuscule.

With this as a backdrop it is difficult to avoid the conclusion that Nissan is playing a very canny game and is intent on extracting a sizeable regional aid package from the British government as a condition of keeping the next generation Almera in Sunderland, in much the same way as it extracted £40m a couple of years ago for the Micra.

In the negotiations which will determine the outcome Nissan knows that it will be holding the strongest cards. With the likelihood of a general election by autumn next year, the government is hardly going to jeopardise the prospects of a major industrial enterprise in one of its most critical support areas.

‘Net’ gain or loss?

The launch in mid-January of what is believed to be the country’s first web-based multi-brand vehicle wholesaling operation represents yet another move by an ‘outsider’ to capture a part of the motor trade by taking advantage of the new more liberal block exemption arrangements. For independent motor traders and the growing number of disenfranchised dealers the opportunity to plug into a supply source of new and pre-registered cars covering around 20 marques is undoubtedly attractive.

For franchised dealers, though, the benefits seem less clear cut. Certainly the ability to widen the product offering will be positive, but the flipside of this is an intensification of competition for the marque that is represented and in which a heavy investment has been made. And, as car retailing becomes ever more concentrated with the major distributors becoming larger and smaller solus sites coming under increasing pressure, the mega groups have the opportunity to develop their own wholesale operations through selling all of the marques they represent through each of their outlets.

However, regardless of whether this latest venture succeeds or fails, it is already clear that the liberalisation of block exemption will attract a band of entrepreneurs keen to explore and exploit every opportunity to build a business and at the same time undermine the entrenched position of existing participants.

Five years from now, vehicle retailing may be largely unchanged or radically different, in the hands of existing players or under the control of a new band of buccaneers, depending on how customer satisfaction and requirements are best met. At the start of the 1990s who would have bet that Ryanair was on course to become Europe’s largest airline?

PAG profits too dependent on Volvo

As Ford continues its long struggle towards regaining financial equilibrium, the spectacular profits recovery of its Premier Automotive Group (PAG) must be a source of considerable satisfaction. After losing almost $900m in 2002, the modest level of profitability for 2003 is expected to be built upon during the current year, which hopefully will be another step towards the division’s target of accounting for 30% of total group profits by the middle of the decade.

At first glance it might be supposed that PAG’s comeback would be a feather in the cap for the British motor industry, where many of the division’s assembly facilities are based. A review of results, however, indicates that the turnaround is overwhelming the work of Volvo where unofficial estimates suggest that the 2003 financial surplus was well in excess of $500m. In contrast, Jaguar continues to lose money, albeit at a lower rate, and Land Rover, while profitable, still has a long way to go before it achieves a meaningful return and is facing the prospect of workforce disruption at Solihull.

If the aforementioned 30% group profits target is to be reached, both Jaguar and Land Rover will need to start generating substantial amounts of largesse for their parent sooner rather than later. With both marques benefiting from renewed model ranges, the product ingredients are largely in place and the primary issue now is whether the manufacturing and marketing systems are capable of delivering.

If over the course of the coming year the answer appears negative, Ford’s response surely would be to examine the potential for relocating part of the assembly network offshore, in which case Land Rover would be under the greatest threat. Aston Martin and Jaguar are probable too dependent on their British heritage and manufacturing bases, but there would appear to be no basic objection to the establishment of an American-based Land Rover plant, in much the same way as the Jeep Cherokee is assembled in Europe in the opposite direction.

Aftermarket events in need of some ‘headbanging’

Aftermarket shows in the UK have had a rough ride in recent years. The SMMT-organised European Automotive Trade Show in 2001 attracted a disappointing level of exhibitors and visitors which prompted the 2003 event to be cancelled. It is understandable therefore that there should be considerable nervousness surrounding this year’s event, dubbed the Automotive Trade Show (ATS), which takes place in March and is being piggybacked with the Commercial Vehicle Show.

The likelihood of success for ATS has not been helped by the running of the rival Aftermarket Show in January, organised by Haymarket Exhibitions and held alongside the Autosport International event at the NEC.

If one show every two years was deemed too much, it is hard to see how the individual organisers can achieve success with two shows within two months. Meanwhile, there is confusion over the extent to which ATS will be a full aftermarket exhibition as opposed to being limited purely to commercial vehicles, and the SMMT is hardly doing itself any favours by omitting all reference to the event on the ‘Events and Exhibitions’ section of its website. What the aftermarket needs is the banging of heads and the establishment of a single dedicated biennial exhibition which is supported by all the key trade associations and sector players.